A covenant not to compete can cover three different things:

1) Preventing an employee from working for a competitor or starting their own competitive business.

2) Preventing an employee from later soliciting a client, or potential clients.

3) Preventing an employee from soliciting your employees or contracts.

The following is a transcript of Video:

Welcome to another edition of the Legal River podcast, a weekly look at the laws and legal issues facing small to medium size businesses.

Hello, my name is James Markels and I’m with General Counsel, P.C. in McLean, Virginia, and I’m gonna talk to you today about covenants not to compete. Or basically these are provisions in an employment contract that an employer will have with its employees to prevent the employee from hurting the employer’s business.

Now really a covenant not to compete can cover three different things. The first is the traditional covenant not to compete which means, which prevents the employee from working for a competitor or starting their own competitive business. The second thing it can do is prevent the employee from later soliciting the clients of, or potential clients, of the employer. And the third thing it can do is prevent the employee from soliciting the employees or contractors or agents or representatives, of the employer.

Now there are, in, in these three different things that can happen in the employment contract, are restrictions of trade. And thus courts in just about every state will consider these to be generally anti public policy. The policy of America is generally that people should be able to work for who they want to work for, and that freedom of trade is a good thing. So these covenants are typically construed very narrowly, and they’re construed — and typically since the employer is the one who drafts them, they are construed against the employer when there’s an ambiguity.

Now to look at each one, there are three general questions that a court will ask when deciding whether or not, or to the extent that it wants to enforce a covenant not to compete. The first thing it’ll ask is, is the covenant drafted no more broadly than necessary to protect the business interest of the employer? Second thing it will ask is, is the covenant drafted in such a way as to not hurt the ability of the employee to make a living? And the last thing it will ask is the catch all, does this covenant violate public policy?

Now when looking at those three aspects of it, of the covenant, there typically will be three additional things that, aspects of these provisions, that the court will look at. The first is how — the duration, how long is this covenant not to compete prohibiting the employee from engaging in the acts? Second thing is, what’s the geographic limitation? Is it worldwide? Is it just in a state? Is it just in a particular zip code? That, that, what, what’s, it, where, where’s the area that the employee is being refrained from acting appropriate — inappropriately in? And the last thing is, what kinds of services, what’s the, what kind of activities are being prohibited here?

Now it is unfortunate that, for most contracts that are drafted by an employer, they tend to draft the language as broad as possible. Because obviously the employer is going into the contractual relationship with the employee not knowing what might happen down the road. That instinct works to the employer’s disadvantage with regard to a covenant not to, not to compete, because the broader the covenant is, the less likely the state — the court will enforce it, because it can’t go any further than necessary to protect the interests of the employer. And this is very important in some states like Virginia, where if the covenant is considered to be overbroad, it’s not enforced at all. While there are certain other states like Maryland, where the — what the court will do instead is make it an in-depth investigation of what kind of business does the employer engage in. What kind of area does the employer, does, do the business in. And then only enforce it that far. So in those permissive states like Maryland, it tends to be okay to overdraw the restriction, while in Virginia you really have to be careful.

So now what kinds of — since this is a case by case basis, that courts are looking at these things, what kinds of prohibitions have courts upheld. And Virginia being the most restrictive, it generally helps to look at that state as an example of what might work. In one of these cases, New River Media Group v. [SOUNDS LIKE: Nighten]. It’s a 1993 case. There the Virginia Supreme Court upheld a covenant not to compete. And what it was for was for a radio station. The disc jockey had his covenant not to compete and it said that the disc jockey could not join a competing radio station within 60 air miles of the employer’s broadcast station for 12 months after the termination.

So let’s look at those three aspects. First you have duration. The duration was 12 months after the termination, or one year. And just as a general rule of thumb, no more than two years. Beyond two years you start having problems, but two years or less tend to be more enforceable. Then you have the geographic restriction. 60 air miles of the employer’s broadcast station, which was probably determined because that was probably the main reach of that particular radio station. And so that was reasonable. Beyond 60 miles, maybe there, they’re not getting as much, many listeners. They’re not getting any ads sold by businesses beyond that point. And so therefore it would not have been reasonable to prohibit the employee from working for a radio station out there. And then finally, what kind of services are being prohibited. He can’t be a disc jockey. Doesn’t prevent him from being a janitor, which would not be in competition with what the radio station is interested in. But as a disc jockey. So those three prongs were sufficiently narrow enough to make the prohibition enforceable.

There’s another one, Advanced Marine Enterprises v. PRC Incorporated, a 1998 decision. Virginia Supreme Court upheld another covenant that prevented former employees for only an eight month period from rendering competing services to or soliciting any customer of the employer for whom the employee performed services while employed, what by the employer within 50 miles of any of the employer’s offices. Now the thing here is the employer had 300 offices all over the world. But that was upheld as enforceable because that was the nature of the employer’s business. They were a worldwide business. Now it only prevented the employee from providing, again, the services that they employed while they were employed with the employer. So again, it can’t prevent him from being a janitor for somebody else. It’s specifically tied to the services that they were already providing to the employer. The geographic scope, again it’s 50 miles within any of these other offices. There just happened to be a lot of offices, but that’s in the interest of the employer. That wherever they’re doing their offices, that’s where they’re doing business. And then finally, the eight month restriction is less than two years.

Now, a lot of these things are on a sliding scale. The more you try to make the duration longer, the closer your geographic restriction will have to be. And maybe there — you want to narrowly range your services as well. So the broader, the wider one of these prongs is, the closer you’re gonna want another one of these.

So as a business owner, what you need to be looking at is, hopefully you have a strategic business model already. You know what kind of services your business provides. You know where your clients are, what kind of clients you’re looking for, and what geographic area you’re really pitching to. And those are important concerns in being able to draft your covenant not to compete. Because only by understanding your own business, and what kind of competition could negatively affect you, are you gonna be able to then help yourself draft a proper covenant not to compete that will be enforceable in the courts.

And as just a couple of closing comments on all of this, one problem that IT companies in particular have been having is that a lot of IT companies have employees that they have their computer at their home and could be doing work for anyone, anywhere in the United States. They could be working — and especially with government contractors, if you were working for one government contract — for like say the Air Force, does that mean that the entire Air Force is your client? Or does that just mean that this particular Air Force base is your client, or what? And generally what I try to tell businesses is, if you want this to be enforceable, the more specific you are and the more carefully you guard the precise business interest that you have, the more likely you’ll be able to defend it. The more you approach it as a — well I just want to cover as much as humanly possible, the less likely a court is gonna be able to defend your interest, and will be willing to defend your interest when you do present your case to the court.

And this concludes our tutorial on covenants not to compete. If you have any questions, you can send an email to questions@legalriver.com or you can contact me personally, jmarkels@generalcounsellaw.com. And I wish to remind you that this is just a legal discussion, all views here are my own and are not intended as legal advice. And if you do have questions about constructing your own, drafting your own covenant not to compete or enforcing one, I recommend that you speak with legal counsel.

Thanks for listening to this edition of the Legal River podcast. If you have a business law question you would like to see answered in a podcast, please email us at podcast@legalriver.com. To reiterate, all views expressed in this presentation are intended only as a general discussion of the issues and should not be regarded as legal advice. For additional details or advice about a specific situation, please consult legal counsel directly.